Academic journal article Review - Federal Reserve Bank of St. Louis

Changes in the Distribution of Wealth: Increasing Inequality

Academic journal article Review - Federal Reserve Bank of St. Louis

Changes in the Distribution of Wealth: Increasing Inequality

Article excerpt

This article describes the changes in the distribution of wealth among U.S. households that occurred between 1983 and 1989, and analyzes the role of several demographic and economic factors in contributing to the changes. It makes use of the Federal Reserve Board's Survey of Consumer Finances, which is one of the few sources of time-series information on household wealth that reports asset holdings of individual households for a sample of the entire population. The period from 1983 to 1989 is a convenient and useful period to study, because it corresponds approximately to a single economic period: the economic expansion that began in November 1982 and ended in June 1990. Academic and popular interest in distributional issues has increased in recent years, and the 1980s have attracted particular attention in the popular press, although most of the attention has been given to changes in the distributions of income and wages.

The article first describes the data in some detail and then the measures of inequality. The third section reports changes in wealth holdings for U.S. households, cross-classified in several ways. This is followed by analysis of the changes in the distribution of wealth, including investigation of some possible explanations for the changes. The final section describes the wealth holdings of the richest 1 percent of U.S. households, who have a large share of total household wealth and whose holdings have been given special attention in previous research.

THE SURVEY OF CONSUMER FINANCES

The Survey of Consumer Finances is conducted by the Survey Research Center of the University of Michigan for the Federal Reserve Board. It was taken at six-to-eight-year intervals between 1962 and 1983, and at three-year intervals since then. The most recent available surveys that are also useful for analysis of the distribution of wealth are those for 1983 and 1989.(1) These surveys are partly longitudinal; some households were interviewed in both years, but they are not identified on the 1989 public-use tape.

In both of these years, the survey has two samples. The larger is a cross-section chosen randomly to represent the entire population of households. It consists of 3,665 households in 1983 and 2,277 in 1989.(2) The smaller is a "high-income" sample of households expected to have unusually large wealth holdings. Because the wealthiest 1 percent of households hold over a quarter of total household wealth, a national sample of households will therefore give little information about a large fraction of household wealth. The additional high-income sample was intended to overcome this limitation. It was selected from IRS records. Households selected were first asked if they would participate in the survey, and then interviewed if they were willing. Procedures were followed to insure confidentiality; the IRS did not know which households participated. There were 438 households in the high-income sample in 1983 and 866 in 1989.

The surveys are very similar but nor identical. The 1983 survey, for example, reports calculations of the present value of Social Security benefits and private pensions expected by workers who are at least 40 years old and have not yet retired. These calculations are based on assumptions about future labor force participation, wages and inflation, among other factors. The 1989 survey does not contain these calculations; it reports only the payment amount of a private pension. For 1983, locational information has been made available on the metropolitan area or county level for the cross-section sample (not the high-income sample), while for 1989 no geographic information has yet been provided on the data tape, although it was collected. Regional information will be released for 1989 in the future. Geographic information would obviously be useful for analyzing some components of wealth, notably real estate.(3)

With a survey design combining a random sample of all U. …

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